Timing Models – Breakouts Hold, Breadth Reflects Broad Participation, Fed Balance Sheet Pops

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As with many things in life, we are usually better off focusing on the present when it comes to stock market analysis. Focus on what IS happening, as opposed to what MIGHT happen. This is a game of odds and the odds favor a continuation of current conditions, as opposed to a change. The trend, especially an uptrend, is more likely to continue than reverse. There will be plenty of concerns along the way, and the financial media will be more than on top of it, but trend is the single most important factor and the trends are clearly up for the major index ETFs.

Similarly, patterns within a bigger uptrend are more likely to resolve themselves to the upside. Flags, falling wedges, pennants, ascending triangles, triangles and flat consolidations are viewed as bullish continuation patterns when the bigger trend is up. In addition, pullbacks, short-term oversold conditions and corrections are viewed as opportunities, not threats. The key is to put the odds in our favor and trade in the direction of the bigger trend.

Holiday Schedule

Just a heads up on the holiday scheduling. The stock exchanges will close early (1PM ET) on Christmas eve (Thursday) and be closed on Friday, Christmas day. I will publish on Tuesday and Wednesday next week.

The stock exchanges will be closed on Friday, January 1st. I will publish once, Wednesday December 30th, between Christmas and New Year.

Looking for more analysis? There is a lot of content with a longer shelf life available on the Premium page (here). This includes:

  • A six part series on trading with the StochClose indicator
  • My view on dividend adjustments
  • RSI for Trend-Following and Momentum
  • Testing the All Weather Portfolio
  • Exit Strategies: Chandelier, Parabolic SAR and ATR Trailing Stop

Triangle Breakouts Hold in SPY and QQQ

SPY broke out with a strong open on Monday, November 9th (V-day), held this breakout and worked its way higher the last four weeks. Basically, we have a 53% advance in 22 weeks, an 11 week consolidation and a breakout that is six weeks old. The breakout is holding and that is pretty much all we need to know. The bears do not have a leg to stand on as long as the breakout holds. A move back below the breakout zone (350) would not be considered a bull trap or failed breakout (bearish). Instead, it would be considered part of the normal ebb and flow of market fluctuations. Moreover, a pullback within a bigger uptrend would set up the next opportunity.

The advance over the last six weeks is actually kind of boring. SPY surged 7.23% the week of the election and then added another 6.31% the last six weeks. SPY has been 15% above its rising 40-week SMA the last four weeks and this is a bit extended. Extended and overbought conditions are not outright bearish and they are certainly not sell signals. Stocks can become overextended and remain overextended in strong uptrends.

The next chart shows QQQ with similar characteristics. Notice that the ETF was 20% above its 40-week SMA on July 10th and the advance continued another seven weeks before a consolidation took hold. QQQ stalled for 12 weeks and broke out a week or two after SPY, but broke out all the same. The breakout is holding and QQQ is extending higher, and even taking the lead again. Although, QQQ never really lost the lead in my book.

IWM Goes 30 for 30

We are running out of superlatives to describe the moon shot in the Russell 2000 ETF (IWM). IWM extended its run with another big week and is now up 34% the last 12 weeks. The ETF is also 32.5% above its 40-week SMA, which is the most since trading began (2000).  IWM was up some 47% in 10 weeks in early June and then corrected with a big outside reversal, which just marked a one week pullback, not a trend reversal.

The 30+ percent advance in 12 weeks is the third for IWM (since 2000). The first occurred in late May and early June 2009 as IWM surged off the March 2009 low. This rocket blastoff signaled the start of a big bull run, but note that IWM corrected with a five week pullback from June 8th to July 10th (2009). IWM was also up 30+ percent in 12 weeks in early June 2020 and then corrected for two to three weeks.

Breadth Models Remain Bullish

The SPX Trend Model remains firmly bullish with five of five indicators on bullish signals since early August. The 5-day SMA for SPY is also firmly above the 200-day SMA (since late May). The SPX Thrust Model is also firmly bullish with three of three indicators on bullish signals.

The Trend Breadth Models remain bullish for all five indexes.

The percent above moving average indicators reflect broad strength within the trend models. Over 85% of stocks are above the three trend model moving averages. The percentages below shows how many stocks in each index are above their 100, 150 and 200 day SMAs.

Over 85% of $SPX and $NDX stocks

  • Over 90% of S&P 100 stocks
  • Over 89% of S&P MidCap 400 stocks
  • Over 90% of S&P SmallCap 600 stocks

We are also seeing new highs expand and remain healthy. The Nasdaq 100 is the leader by far, but we are also seeing expanded leadership in mid-caps the last few weeks.

  • Nasdaq 100 High-Low Percent reached 17.5% on Thursday.
  • S&P MidCap 400 High-Low Percent reached 14.5% this week.
  • S&P SmallCap 600 High-Low% cleared 10% four times this month.

The chart below shows the Trend Model indicators for the S&P 500. Notice how %Above 100-day SMA moved above 75% in mid July and remained so until early September (blue shading). This indicator moved above 75% on November 9th and remains above this threshold. A move below 75% could signal a pullback or correction.

Four of the five Thrust Breadth Models remain bullish. The S&P 100 is the only model that is net bearish. I would not read too much into this because the index has just 100 stocks and the other four models are net bullish. Take the weight of the evidence.

The chart below shows the Thrust Model indicators for the S&P 500. %Above 50-day SMA surged above 70% in early November (green arrow) and remained largely above 70%. The blue lines are set at 60% and this advance could continue as long as this indicator holds above 60%. The move below 60% in early September signaled the start of a corrective period.

You can learn more about the methodology and historical performance for these breadth models in this article.

There is no change in the Sector Breadth Model, which is almost all green. All eleven sectors are net bullish and 31 of 33 indicators are net bullish. Tech, Healthcare, and Communication Services have been net bullish since April. Consumer Discretionary, Industrials, Consumer Staples and Materials have been net bullish since July.

Sector Breadth Model charts can be found on the Art’s Charts ChartList.

Yield Spreads and Fed Balance Sheet

The AAA and BBB spreads narrowed from late September to early December, and reached levels not seen since before the covid-19 crash. AAA spreads are at normal levels and there are no signs of stress at the investment grade end of the bond market.

The Junk and CCC spreads narrowed dramatically from late September to mid December. Junk spreads are back at pre-covid levels and CCC spreads are at 8.44, which is the narrowest since May 2019. For reference, CCC spreads were last below 8 from April to October 2018. Oil was above $70 in October 2018 and then plunged below $50 by yearend. And then moved back to the mid 60s by April 2019. That was one heck of a ride.

The Fed balance sheet expanded by $120 billion and this was the largest increase since mid May. Overall, the balance sheet slowly expanded from mid July to early December, and then jumped above $7.3 trillion this past week. I love the taste of Kool-Aid in the morning.

Thanks for tuning in and have a great Friday!

ETF Trends, Patterns and Setups – Tech ETFs Lead, Signs of Strength and Froth, lntermarket Dynamics

The technology-related ETFs are coming back to life with the Technology SPDR (XLK) and Nasdaq 100 ETF (QQQ) moving to new highs this week. These two are just playing a little catchup because several other tech-related ETFs already hit new highs in late November (SOXX, IGV, SKYY, HACK, FDN, IPAY, FINX). Energy and banks are attracting a lot of attention still, but these tech-related ETFs are the ones trading at new highs.

ETF Trends, Patterns and Setups – Tech ETFs Lead, Signs of Strength and Froth, lntermarket Dynamics Read More »

Timing Models – Broad Participation during Uneven Advance – Evidence Bullish with Signs of Excess

The major index ETFs notched fresh new highs this week with the Russell 2000 ETF leading the way. Despite new highs, the market advance is quite uneven. As of 10AM Friday morning, IWM was up around 1.5% for the week, while SPY was down 1.2% and QQQ was down around 1.6%. It is not often that we see such seesaw action. As we will see in detail below, there is also a significant performance discrepancy since the open on November 9th (vaccine day).

Timing Models – Broad Participation during Uneven Advance – Evidence Bullish with Signs of Excess Read More »

ETF Trends, Patterns and Setups – True Leaders and New Leaders, Big Runs and High RSI Values

Most stock-related ETFs are in uptrends of some sort and many are quite extended after big runs since late October (26 days). ETFs hitting new highs this month are the true leaders (SPY, QQQ, IWM, XME, XRT, SKYY). There is also a group with market-leading gains the last 27 days (since late October), but they are not “true” leaders. The energy-related ETFs (XES, FCG, XOP) are up more than 40%, the Airline (JETS)

ETF Trends, Patterns and Setups – True Leaders and New Leaders, Big Runs and High RSI Values Read More »

Timing Models – Trend and Price Action Override Sentiment and Extremes

Outside of sentiment and some extremes in price and breadth, one would be hard pressed to find negatives in the stock market right now. Stocks and risk assets are rising, while Treasury bonds and safe-havens are out of favor. Since November, SPY and QQQ are up more than 12% and IWM is up more than 20%. Oil and copper are up double digits. Clearly, the reopening trade has center stage.

Timing Models – Trend and Price Action Override Sentiment and Extremes Read More »

ETF Trends, Patterns and Setups – New Uptrends Emerge, Mean-Reversions Setups are Scarce and Many ETFs Get Extended

There are lots of long-term uptrends in the equity-related ETFs, but there are not many short-term bullish setups. Most of the setups materialized in early November as stocks declined in October and RSI moved into the oversold zone for dozens of ETFs. With the November surge, RSI moved above 70 within the last five days for more than half of the equity-related ETFs in the Core List.

ETF Trends, Patterns and Setups – New Uptrends Emerge, Mean-Reversions Setups are Scarce and Many ETFs Get Extended Read More »

Breadth Extremes in Consumer Discretionary, Energy Breadth Triggers Net Bullish and Two Tech Laggards Return to Leaderboard

Today’s report is a bit of a hodge-podge. There are signs of extreme in some breadth indicators, but signs of extreme are not very good when it comes to timing because indicators can remain near extremes for a few months. I will then turn to the new breadth signal in the Energy SPDR (XLE) and the breakout on the chart. Even though Energy and Banks are leading the last three months, let’s not forget about the tech-related ETFs, which are breaking out to new highs and truly leading.

Breadth Extremes in Consumer Discretionary, Energy Breadth Triggers Net Bullish and Two Tech Laggards Return to Leaderboard Read More »

Timing Models – Concerns Versus Evidence, Breadth Models, %Above 200-day, AAII Bull-Bear and Yield Spreads

The weight of the evidence remains bullish, but there are some concerns with excesses in the S&P 500 and underperformance in prior leaders. The excesses are a result of the recent rotations as money moved into the lagging groups: finance and energy. This pushed many of their component stocks above their 200-day SMAs. Money did not exactly move out of the leading groups because they simply consolidated, as

Timing Models – Concerns Versus Evidence, Breadth Models, %Above 200-day, AAII Bull-Bear and Yield Spreads Read More »

ETF Trends, Patterns and Setups – Bullish Consolidation Patterns or Reversals? Is Rotation Bullish?

We never know if a consolidation will mark a top or a bullish continuation pattern. Three out of four times (guesstimate), a consolidation within an uptrend is a bullish continuation pattern that resolves to the upside. Sometimes, however, a consolidation is resolved on the downside and results in a reversal. This is the concern going forward for several

ETF Trends, Patterns and Setups – Bullish Consolidation Patterns or Reversals? Is Rotation Bullish? Read More »

Timing Models – Trend and Breadth Remain Bullish, Signs of Excess Appear with Unusual Price Action

The bulk of the evidence remains bullish, but signs of excess and above average volatility are creeping into the picture. In addition, QQQ did not confirm this week’s new high in SPY and large-cap techs are dragging their feet. Today we will review this week’s unusual price action and quantify excesses with %Above 200-day SMA.

Timing Models – Trend and Breadth Remain Bullish, Signs of Excess Appear with Unusual Price Action Read More »

ETF Trends, Patterns and Setups – Lockdown-Tech ETFs form Bullish Continuation Patterns, Reflation ETFs Break Out

Don’t like the current rotations in the stock market? Wait a week and it will change. Tech stocks led the market higher immediately after the election with big moves last Wednesday, Thursday and Friday. The reflation trade then took over this week as some of the worst performing groups surged (finance, defense, banks, energy). Money moved out of tech and lockdown related ETFs to fund this rotation.

ETF Trends, Patterns and Setups – Lockdown-Tech ETFs form Bullish Continuation Patterns, Reflation ETFs Break Out Read More »

Timing Models – A Tide that Lifts All Boats (Stocks, Bonds, Gold, Commodities)

Pretty much everything moved higher the last four days. Well, everything but the Dollar. Stocks surged with QQQ leading the charge. Money did not rotate out of safe-haven bonds as the 20+ Yr Treasury Bond ETF and Corporate Bond ETF gained over 2%. Oil was up over 7%, copper was up around 2% and the Gold SPDR took advantage of Dollar weakness

Timing Models – A Tide that Lifts All Boats (Stocks, Bonds, Gold, Commodities) Read More »

ETF Trends, Patterns and Setups – Tech-related ETFs Lead as Reflation Trade Takes Back Seat

The charts are full of bullish consolidation patterns over the last one to two months. There are triangles, flat consolidations and falling channels. These patterns, when forming after a big advance, represent a correction and a bullish resolution is expected. Why? Because the path of least resistance is up when the bigger trends are up and the breadth models are bullish.

ETF Trends, Patterns and Setups – Tech-related ETFs Lead as Reflation Trade Takes Back Seat Read More »

Timing Models – Noise or A Reversal in the Making?

The S&P 500 SPDR shows a reversal in the making when we focus on the candlesticks the last four weeks, but the overall trend remains up and the Trend Breadth Models have yet to flip. The chart below shows SPY with a long white candlestick four weeks ago, two indecisive candlesticks and a long black candlestick this week. Despite the extra candlestick, these four clearly capture the essence

Timing Models – Noise or A Reversal in the Making? Read More »

ETF Trends, Patterns and Setups – Leaders Revert Back to Laggards, Rising Correlations, Bonds and Gold Stuck Together

Last week I wrote about a possible changing of the guard, and Wednesday I had to rein in the bulls as small-caps and banks got cold feet. While the sudden change of heart over the last three days is not quite as dramatic as the rise from the ashes in late September, it is a warning shot across the bow for the stock market. Small-caps, mid-caps and banks are simply not performing that well this year.

ETF Trends, Patterns and Setups – Leaders Revert Back to Laggards, Rising Correlations, Bonds and Gold Stuck Together Read More »

Not So Fast There, Cowboy – The Reflation/Value Trade Gets Cold Feet

Small-caps and banks went from potential leaders to potential failures over the past week. Basically, the markets got cold feet on the reflation/value trade and bailed the last two days. I do not know if this is just pre-election jitters, but there are a lot of BIG unknowns out there right now. These include the uneven rebound in stocks, election, covid,

Not So Fast There, Cowboy – The Reflation/Value Trade Gets Cold Feet Read More »

Where to Chart the ATR Trailing Stop, the Trigger in SPY and the Developing Flag

This article updates the ATR Trailing Stop and show how anyone can chart it. As noted in the first part, the Chandelier Exit and Parabolic SAR are lacking as far as I am concerned. The Chandelier Exit is fixed to the high based on a lookback period, which may or may not fit the current trade. Parabolic SAR is too volatile and complicated.

Where to Chart the ATR Trailing Stop, the Trigger in SPY and the Developing Flag Read More »

Timing Models – Breadth Model/Indicator Review, Testing Model Signals with SPY and QQQ

Today’s report will focus on the breadth models, the breadth indicators for the S&P 500 and the long-term trend for the S&P 500. All are in bull mode right now and the broad market environment is bullish. I am also updating the backtest for the Trend Breadth Model and then adding a twist by trading QQQ with signals from the S&P 500 Trend Breadth Model.

Timing Models – Breadth Model/Indicator Review, Testing Model Signals with SPY and QQQ Read More »

Bullish Consolidations Form, Banks Perk Up, Yields Spreads Narrow and Fed Balance Sheet hits New High

Stocks remain strong overall with small-caps starting to outperform. Moreover, the small-cap ETFs worked off their short-term overbought conditions with bullish continuation patterns. Not to be totally left behind, SPY and QQQ also formed short-term bullish continuation patterns.

Bullish Consolidations Form, Banks Perk Up, Yields Spreads Narrow and Fed Balance Sheet hits New High Read More »

ETF Trends Patterns & Setups – Surge and Stall for IWM, Bond ETFs Struggle, Banks Show Strength

A changing of the guard may be in the works as small-caps, banks and utilities take the lead short-term. It all started on 25-Sept when the small-cap and banking ETFs surged from their lagging positions. Large-caps and large-cap techs participated in this surge, but many did not exceed their early September highs. IWM, KRE and XLU exceeded these highs and showed short-term leadership. Can it continue?

ETF Trends Patterns & Setups – Surge and Stall for IWM, Bond ETFs Struggle, Banks Show Strength Read More »

Activity in the Intermarket Arena: Bonds, Inflation-Indexed Bonds, Commodity ETFs and the Dollar

There is some curious activity in the intermarket arena. Namely, we are seeing continued weakness in Treasury bonds, relative strength in inflation-indexed bonds, weakness in the Dollar and strength in several commodity groups. I do not trade off intermarket relationships, but I do trade specific patterns and there are several commodity related ETFs with bullish breakouts working. Today’s commentary will focus on the DB commodity ETFs:

Activity in the Intermarket Arena: Bonds, Inflation-Indexed Bonds, Commodity ETFs and the Dollar Read More »

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